Resource players take the long view

It is fitting and timely that the overarching theme of leading participants at the Australian Resources Conference in Perth yesterday was the long view of energy and resources.

That was appropriate given West Australian Premier
Colin Barnett
’s demand that media commentators and others refrain from referring to the resources sector as being bound by boom and bust cycles. As Premier of the state that is more reliant on resources capital expenditure than any other, Barnett wants to maintain a steady state of sustainable activity.

At the moment, WA is benefiting from $167 billion in capital investment in resources projects that will lead to a trebling in LNG production and doubling in iron ore production.

Barnett’s preferred scenario of modest retrenchment in projects rather than radical cutbacks appears to be happening. However, he would be concerned at the reasons local and multinational companies are re­thinking investments.

David Peever
, managing director of
Rio Tinto
in Australia, says the deceleration in activity across the sector in Australia is caused by rising costs that are making Australia uncompetitive. While he would not be pinned down on Rio’s lowest possible cost target, he made it clear that ­governments cannot take the company’s presence for granted.

Rio, like BHP, Xstrata and Peabody Energy, is looking at its costs in Queensland where their coal businesses have been hit with a huge increase in royalty charges. But, in comments that would have been music to the ears of Barnett and federal Energy Minister
Martin Ferguson
, Peever says Rio has pole position in the iron ore market.

It so happens that on the eve of the Australian Resources Conference, which is organised by The Australian Financial Review and the ASX, iron ore spot prices jumped to $US122.20, the highest level in three months. That will relieve pressure on Rio’s competitors such as
Fortescue Metals Group
.

Ferguson was naturally forced to defend the government’s resources tax. But at least he was given strong support from Peever, who says it is working as it was designed to do.

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In other words, when iron ore and coalmining companies are struggling to make profits, the tax take will be low. Implicit in that comment is that when super profits are earned it will kick in big time.

Those attracted to the long view will have taken heart from the release of the annual World Energy Outlook released in Paris by the International Energy Agency (IEA).

This 690-page document concludes that the world is failing to put the global energy system on a sustainable footing: CO2 emissions are rising, energy dynamics are determined by emerging economies, fossil fuels remain the dominant energy sources and more than 1 billion people are without access to electricity.

But from a purely selfish Australian energy export point of view, the report underlines Australia’s powerful long-term strategic position. Coal met 45 per cent of the growth in global energy demand over the past decade and it will comprise 25 per cent of global energy consumption in 2035, making it the second-most important fuel behind oil.

The IEA says natural gas production prospects are brightest in Australia over the period to 2035. Australia will account for 3 per cent of world natural gas production in 2035.

Never waste a crisis. That was the message from
National Australia Bank
chief executive
Cameron Clyne
in a speech to the Lowy Institute in Sydney on Tuesday night.

Clyne accepts that there is nothing he can do to stop another inquiry into the Australian financial system. He just wants to make sure that it focuses on reform that will help Australia meet the challenges of the future rather than rake over issues that are adequately addressed by existing frameworks.

The global financial crisis exposed a number of weaknesses in the Australian financial system.

Clyne says the system is not optimised to finance Australia’s long term infrastructure needs smoothly. Of even greater concern is that banks will not be able to finance the funding needs of small to medium-sized businesses.

NAB should know the business market better than any other bank, given its leading market share. Clyne says SMEs are too reliant on commercial banks for their funding needs and market-based funding alternatives need to be developed.

Australia needs to reduce its reliance on foreign wholesale funding which is running at about $100 billion a year. He says there are at least four options that must be examined.

First, change the tax system to align the tax treatment of debt and savings. This has been tried before but the government back-tracked before it was implemented.

Second, review how investment mandates change while noting the importance of a diversified portfolio less reliant on equities. This is a refrain of the argument put by
Ken Henry
that has been falling on deaf ears among investors.

Third, expand the domestic bond market. Chanticleer believes this is the single most important change that can be made to the structure of the Australian financial system but the government is dragging the chain.

Clyne thinks changes to prospectus obligations will help. But that assumes the bond market will be driven by retail investors. A truly healthy and thriving domestic corporate bond market needs full-blooded institutional investor support. Retail investors will not carry the day.

Finally, Clyne says further development of the securitisation market and the treatment and role of prime residential lending on bank balance sheets needs to be reviewed.

He refers to successful RMBS models overseas, without naming anyone. The assumption is he is talking about Canada where the government system for guaranteeing housing credit is also used as a tool for tightening lending standards and taking the heat out of the market.

Another insightful comment from Clyne was about engagement with Asia. He says “any signs of a closed Australian mentality or economic xenophobia are completely unhelpful and not in keeping with our aim to be an engaged partner in the Asian century, not just a beneficiary".

The exclusive club of chief executives aged over 80 from public companies listed in Australia, the United States, France Germany and the United Kingdom has barely enough members to fill a phone box, according to data from S&P Capital IQ.

In terms of short-term share price performance, the pre-eminent member of the club is News Corp chairman and chief executive Murdoch, who is sitting on stock price gains this year of 35.7 per cent.

Murdoch, 81, is riding high because of the combined impact of News Corp shares coming off a low last year caused by the phone hacking scandal, the success of his entertainment businesses and the prospect of a demerger leading to a re-rating of the film, cable TV and satellite TV operations.

Coming in second in terms of short-term performance but a clear winner in the long term, is the chairman and chief executive of Berkshire Hathaway, Buffett.

The company’s A class shares are up 11.68 per cent this year to $128,160. But Buffett’s preferred measure of movement in book value shows that the stock achieved a compound annual return of 19 per cent between 1964 and 2011.

Buffett, 82, is one octogenarian contemplating retirement. He said in his last shareholder letter that CEO succession planning was “at the top of my mind" and that he had identified his successor.

Third in short-term share price performance stakes is Howard Solomon, 84, chairman and chief executive of US pharmaceutical company Forest Laboratories. His stock is up 7.7 per cent this year.

Last but not least is Reg Kermode, 85, the chairman and chief executive of Cabcharge. His shares are up 6.9 per cent this year but down 20 per cent this month.

The stock was hit when NSW Transport Minister Gladys Berejiklian decided to put bus contracts to competitive tender rather than reappointment through negotiation.

Cabcharge subsidiary ComfortDelGro Cabcharge Pty Ltd, recently lost the tender for metropolitan bus contracts in regions 1 and 3. Kermode says this was a bitter dis­appointment but that it won’t affect the company in the long term.

However, Goldman Sachs analyst Jim Godsil has since downgraded the stock from “neutral" to “sell".